Hello, this is Claire Rubin, Private Bank Investment Strategist at Fifth Third Bank with this week’s Economic Beat.
Global equities were mixed last week in volatile trading. The intense volatility in equity markets may have been partially attributed to the continued backup in rates. The yield on the 10-year U.S. Treasury rose another 17 basis points to end the week at 1.57%, a level—while still low—is significantly higher than the 0.51% closing low reached in August. The ongoing bear market in bonds may be driven by increasing inflation expectations amid a strong macroeconomic environment, solid corporate earnings, improving COVID-19 trends and expectations for more fiscal stimulus.
The S&P 500 managed to end the week in positive territory after surging in afternoon trading Friday to erase a weekly decline. The benchmark index ended the week up 0.8% in total return, while the blue-chip Dow Jones Industrial Average rose 1.9% for the week. The tech-heavy Nasdaq Composite lost 2.1%, as technology shares underperformed. Stocks of richly valued growth companies tend to underperform in rising interest rate environments, not because of any threat to their business model, but because higher interest rates diminish the present value of the distant earnings that are incorporated into their price. Energy stocks extended their recent rally, as the price of crude continued to surge.
Federal Reserve Chairman Jerome Powell noted that he would be concerned about market conditions or a persistent tightening of financial conditions only if it hindered progress toward the central bank’s employment and inflation goals.
The U.S. Senate passed President Joe Biden’s American Rescue Plan over the weekend, a $1.9 trillion stimulus package to support the U.S. economy amid the ongoing COVID-19 pandemic. The measure includes $1,400 checks for some individuals, extension of supplemental unemployment benefits and funds for vaccine distribution. It now returns to the House of Representatives for a vote, with lawmakers targeting passage by March 14.
Economic releases last week were largely upbeat. The Institute for Supply Management's (ISM) Manufacturing Purchasing Managers Index, or PMI, expanded in February at the fastest pace in three years, beating economists’ forecasts. The PMI rose to 60.8 from 58.7 in the prior month, well above the threshold of 50 that indicates expansion in the sector. The ISM Services PMI unexpectedly dipped to 55.3 amid severe winter weather in much of the United States.
Applications for U.S. state unemployment benefits rose slightly in the last week of February, though the reading was better than expected. In other labor market news, the Bureau of Labor Statistics reported that nonfarm payrolls surged by 379,000 in February and the unemployment rate ticked lower to 6.2% amid declining COVID-19 cases and an easing of business restrictions in some states. The labor force participation rate held at 61.4% and average hourly earnings continued to grow at a 5.3% year-over-year pace.
In the week ahead, the U.S. economic calendar is relatively light but includes inflation data and small business optimism. The February consumer price index may indicate building price pressures in pockets of the economy, which economists are watching for closely.
The European Central Bank sets monetary policy this week. Officials may discuss whether the recent increase in government bond yields is an unjustified tightening of financial conditions that needs to be addressed. The Bank of Canada also meets.
As always, we’ll be watching and reporting back to you. Thank you.